insurance of catastrophe risks in germany prof. dr. martin balleer, georg-august-universität...

Insurance of catastrophe risks in Germany

Prof. Dr. Martin Balleer, Georg-August-Universität Göttingen, GermanyEuropean Actuarial Academy (EAA)

05th – 07th June 2015, Arandelovac, Serbia

XIII International Symposium on Insurance

„CATASTROPHE RISK MANAGEMENT AND SUSTAINABLE DEVELOPMENT“


Natural disasters

Man-made disasters

Source: Sigma 1/2011


Number of terrorism attacks from 1982 - 2003


History

•Originally damages generated by terroristic acts were included in the insurance coverage of property - without any terrorism exclusions or special underwriting procedures

•The terrorist attack of 9/11 in 2001 has changed the situation. Around $ 38

billion had been paid by the insurance industry to cover insurance risks

generated by 9/11.

•The consequence: The reinsurance companies cancelled the property insurance as well as the casualty insurance and offered a prolongation by excluding terroristic risks or – minimum - granting terrorism coverage only on a very low level. The primary insurers followed.

•The result: An insurance coverage of industrial risks and other large risks were not available anymore. But a limited risk transfer – a relevant production factor - could slow economic recovery and growth. Specific terrorism insurance policies were born.


Definition of terrorism

„…´acts of terrorism´ means acts of persons acting on behalf of, or in connection with,any organisation which carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty´s government in the United Kingdom or any other government de jure or de facto“. (PoolRe, United Kingdom, since 1993)

„…´acts of terrorism means acts of persons or groups of persons acting in order to reach political, religious,ethnical or ideological targets that are able to spread fear and terror within the population or parts of the population and therefore to generate influence on the government or other state organisations.“ (EXTREMUS, Germany, since 2002).

Meanwhile terrorism risks are also seen as man-made CAT-risks against the background that the amount of claims often reaches the amount of natural disasters like earthquake etc. (see 9/11 in New York).


EXTREMUS AG

•Established September 2002, accepting business from November 2002

•Founded by 16 major insurance companies involved in CAT-risks as shareholders: Allianz, AIG, Deutsche Rück, DEVK, Generali, Gothaer, HDI, HUK-Coburg, LVM, Munich Re, R+V, Signal Iduna, Swiss Re, VHV, Zurich-Group.

•Working as a reinsurer for domestic primary insurers who are able to cede terrorism cover for larger risks that exceed € 25 million (=retention).

•EXTREMUS is offering maximal € 10 billion as a terrorism coverage by integrating a guarantee of € 8 billion by the government.

•Risk coverage isn´t obligatory, but 98% of companies are using EXTREMUS as a risk carrier for terrorism risks provided that they accept a retention of € 25 million.

•Risk coverage can only be bought for risks in Germany. EXTREMUS also provides risk cover for other markets in cooperation with Lloyd´s syndicates.


EXTREMUS AG

Limits of the public-private partnership

1.layer: € 25 million by underwriting companies

2.layer: € 2 billion in the annual aggregate co-insured by EXTREMUS members;

the maximum of risk cover is reinsured by national and international

insurance markets

3.layer: € 8 billion in the annual aggregate in excess of € 2 billion given by the

government; the government is participating in the premiums; this solution is in

concordance with article 87 EGV (European Community Contract):

Maximal annual aggregate limit of € 1,5 billion for each policy or enterprise.

Premium calculation: Premiums rates are based on geographical zones.


EXTREMUS AG

Coverage

•Applies to physical damage and business interruption for property for risks valued at over € 25 million.

•Included: Only covers acts of terrorism occurring in Germany. The cover follows the same conditions and all locations of the underlying property policy, meaning that an insured cannot elect only to cover certain high-risk locations with EXTREMUS. Vehicles and their cargo can be covered.The cover includes a 24 hours occurence clause.

•Excluded: Sabotage, war/civil war, civil disorder/looting, confiscation, nuclear, biological and chemical contamination (except if substances are already kept on the insured property), works of art, computer virusses/data loss etc., marine and aviation.


Gross premiums

Number of contracts

Insured sum

Maximum annual limit

Risk locations

EXTREMUS AG

Business development


Outlook on international aspects

•The schemes for terrorism coverage differ from country to country with regard to the definition of terrorism, with regard to the exclusions, with regard to the state guarantees and with regard to the amount of the coverage available. Nearly all schemes are defined with government participation. Many coutries offer unlimited cover with the government acting as the insurer of last resort.

•Principally the coverage is offered for acts of terrorism within the territories of that country only. So the design of global terrorism insurance programmes is rather complex.

•Nevertheless: A strong commercial market for terrorism insurance has been developed – both for domestic terrorism cover as well as for global terrorism insurance programs against the background that international companies try to require a global terrorism insurance policy. The coverage takes advantage of the increasing use of the capital market by Alternative Risk Transfer.

Source: airmic Technical, Terrorism Insurance Review, Report 2013


Outlook on international aspects: United Kingdom

•Pool Re-insurance Company Lt. (Pool Re), established in 1993, providing reinsurance to member insurers,which includes terrorism coverage under their property policies. Applies to property damage policies, which include terrorism cover in UK.

•Coverage: The scheme uses the definition of an Act of Terrorism (see above). War and related risks are excluded as well as damages to computer systems caused by virus,hacking or similiar actions. There is no exclusion for chemical, biological, radiological or nuclear contamination – subject to the terms of the policy.

•Unlimited maximum pool losses. 1st layer: Each insurer up to an individual threshold; 2nd layer: Reserves accumulated by the insurance industry within Pool Re; 3rd layer: Exceeding claims can be drawn from the government, regardless of the scale of losses.

•Premium rates are between 0.03% (central London) and 0.006% (rest of UK).


Outlook on international aspects: United States of America

•Terrorism Risk Insurance Act (TRIA), established in 2002 as a consequence of 9/11, and extended by the U.S. Terrorism Risk Insurance Program Reauthorisation Act (TRIPRA) in 2007.

•Coverage: Covering all commercial property & casualty lines. TRIA is triggered when state institutions are certifying the act as a terrorism act ( minimum $ 5 million loss) and take place on U.S. soil. Excluded are financial guarantees, burglary, professional liability, medical malpractice etc.

•Limits of $ 100 billion annual aggregate, including insurance industry aggregate retentions. Insofar insurers are „capped“ at their retention levels.

•Premium rates are flexible, dependend on

the underwriting of the insurer.

Average premium rates in %0 of insured risks


Outlook on international aspects: France

•Pool: Gestion de L´Assurance et de la Reassurance de Risque Attentats et Actes de Terrorisme (GAREAT), established in 2002, in order to suppoert the domestic insurers that are forced by law to integrate terrorism cover.

•Coverage: Compulsory for all companies, applied to property and business interruption losses from commercial, industrial and professional risks where the sum insured exceeds € 6 million – provided that the insurance contract covers for property damage. Coverage includes risks domicilated in France and oversees departments of France. All acts of terrorism are included. Risks covered by marine, aviation and transport are not covered.

•Unlimited pool losses: 1st layer: € 400 million co-insured by GAREAT members; 2nd layer: € 1,9 billion in excess reinsured by international reinsurance market; 3rd layer: Unlimited, reinsured by the government owned Caisse Centrale et Reássurance (CCR).

•Premium rates:6% (€ 6 - € 20 million), 12% (€ 20 - € 50 million), 18% (over € 50 million) of the insured value.

Thank you for your attention !

Dr. Martin Balleer

[email protected]